Land bubble planted a hidden danger for the real estate bubble. Financial institutions’ strong support of the real estate development create very favorable conditions for speculators, resulting in sufficient funds for housing exchange, led to further real estate bubble. Bank lending gives people good expectation for real estate. Besides speculative demand, it also stimulates people’s consumption demand. People have access to get loans, and participating in purchasing house. Rising demand finally leads to price increasing. (In external business, irrational people need a large number of capital.
Financial institutions tend to offer lower interest rates for housing credit using houses as mortgage, considering the prospect of real estate. So, large amount of capital flows into the real estate market. This approach has provided funds for the protection of speculators, and artificially increased the demand for real estate. ) On the other hand, considering the bank’s own interests, when the bank holds a large number of real estate, its assets would be overvalued, thus enlarge the bank’s capital base and its asset quality and profitability.
Under these conditions, the bank will further expand housing credit, which further promoted the rise in house prices. 4) Government Factors Defects in land transfer system: In China, the ownership of land belongs to country. While, defects in China’s current land transfer system also boost the high prices. When the real estate business needs to purchase land, you need to pay land transfer fees to the government. Of these, 70% of the transfer fee to the local government.
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As a result, driven by political achievements and rise of GDP, local governments sell lands at high prices through bidding, auction and licensed.
This directly results rising house prices based on expensive land. In addition, the land transfer system provides a space for the rent-seeking. Rent-seeking costs also contribute to existing price. Related to economic policy: In the year of 2006, the exchange rate of RMB against the dollar increase continuously. So far, the RMB exchange rate has been increased from 1:8 to 1:6. 81. Under the pressure of currency appreciation, Chinese export, which contributes to over 1/3 of GDP and takes advantage of low price, experienced damage.
Thus, in the next few years, the central bank lowers interest rates five times in succession. As other economic crisis around the world, the policy of lowering interest rates caused by currency appreciation has not guided capital flows into real economy. Instead, capital quickly enters the real estate industry, which has led to today’s high demand for housing and high housing prices. Trends Analysis After discussion the causes, we will predict the trends by comparing the difference between China and Japan under researches and data analysis.
Chinese Government’s Control on Financial Systems
The efficiency of banking regulation is inferior to Chinese ones, and the enterprises in Japan are more independent than Chinese ones. Before the bubble, the Japan government fails to exert effective regulation and guidance for the commercial banks, while the financial institution are the biggest supporters for the real estate bubble, fueling the bubble for almost 10 years. On the contrary, Chinese government possesses strong power to keep the banks and enterprises in regulation, by guiding the direction of the money, containing the speculation capital at the very beginning, implement policies at proper time, and hurdling the property bubble.
Bank of China, the country’s third-largest listed lender by assets, announced this week that profits rose 26 per cent last year to Rmb81bn but, as with ICBC, the growth came on the back of a big expansion in credit and at the cost of falling margins. Both banks said they intended to cut back on lending this year in line with strict government quotas imposed at the start of the year because of worries that rampant credit growth has created asset bubbles, particularly in property.
Although the Chinese government started to encourage the mortgage from 2009, to stimulate the real estate investment behavior, especially encourage the construction of affordable housing to ease the difficulty in house buying, the government is persistently strict with supervision of bank business in mortgage. The supervision process is complex and requires assessment in the loan applicant’s business activities, repayment ability, and study the profitability of investment projects. And at the same time, the mortgage real estate ensures the credit of lenders.
Al these actions prevent banks from uncontrolled, low-security lending behavior and also inhibit the real estate market speculation to some extent. In addition, due to the level of Chinese economic development have not reached the level of Japan in late 80s 20th century, and the constraints in financial system, Chinese government is relatively strict with the supervision of financial sector, especially with the object of financing, such as prohibition of loans entering into the stock market.
These actions reduce the credit risk of financial institutions and prevent sowing the seeds for the huge amount of irrecoverable debts. China Japan Table 7 However, we must have a clear conscious that, from the second half of 2009, to encourage real estate investment, the Chinese government relaxes the policy requirements for lending, resulting in a substantial growth of domestic lending part of investment and development funding.
The Difference of Urbanization
The urbanization rate of Japan scaled the height of 76. 7% in 1985, indicating the end of urbanization process; yet China is still accelerating in the progress of urbanization, reaching only 45. 68% in 2008. In comparison with the developed countries with the urbanization rate of 90%, more and more population will be shifted from rural areas to cities. The population of rural areas was only 34% of the total population when the Lewis turning point appeared in Japan in 1960s; and the percentage of rural population is 34% for North Korea when the Lewis turning point appeared in 1980s. China has a long way to go.
What’s more, there is a much more vast area of the real estate market in China than Japan, when the risk accumulated quickly in one specific area, the capital will shift to other cities. The development of transportation enhances the shift from first-line cities to second-line cities. Therefore, the breadth and depth of the Chinese real estate market is unmatchable by Japan, with the immense volume of accommodating risk.
The Difference of Demographic Structure
The total population of Japan reaches its pinnacle in 1990, while the total population of China won’t reach its peak until 2030. Lewis turning point, the indication of the transform form the rural labor to urban labor, appeared in Japan at the end of 1960s. However, China saw the Lewis turning point around 2007. The demographic dividend (the large portion of potential efficient labor) of China will persist to around 2015 in comparison to Japan, where the demographic disappeared in 1980s.
Furthermore, China could achieve a second round demographic dividend through establishing creative systems, social security system, improving the labor market, enhancing the education level and job training, abolishing the household registration system. Economic indicators before and after the Lewis turning point Table 8 (Source:Arthur Kroebor(2010))/
Monetary and Exchange Rate Policy
The origin of Japan’s stagnation for the 20 years after its housing bubble burst lies in its failure to stand up to US pressure for the yen to appreciate. Indeed, the yen rose from a low of Y260/$ in February 1985 to Y200/$ 10 months later and on to the high of Y80/$ in May 1995. Japan’s economic performance in the past 20 years has lagged its potential.
In fact, policy counter-measures – monetary easing and fiscal stimulus against too-rapid yen appreciation – grew stronger in 1986. Monetary easing continued until 1989. Considering what was going on in the property market, this monetary tightening and strong regulatory measures, such as restrictions on loan-to-value ratios, should have been applied much earlier, in 1987 or 1988. The bubble may not be completely avoided purely by monetary tightening, but the damage may be reduced by early tightening and prudential regulations.
The Chinese authorities are doing better than their Japanese counterparts in the 1980s. The central bank is tightening regulation of loan-to-value ratios and trying to end easy credit. But they are hesitating to take up the best policy – interest rate hikes and appreciation of the Chinese Renminbi. The property bubble is a clear sign of overheating. China’s reported inflation rate does not show rampant inflation, but that was also the case in Japan in the 1980s.
Investment Demand in China
The need of investment in property market is huge in China, which should be satisfied. To some extent, the investment need is rigid demand, while the dwelling need is merely soft demand. The unusual prosperity in Chinese real estate market is highly related to the limited channel to invest in China, where the lower tax of household transaction and the demographic structure each play a role. An important reason for the real estate bubble in Japan was due to the aging of the population, when the passion for investment faded. However, the average age of Chinese people is around 32, which is the peak period of investment with overwhelm passion.
Therefore, even though the adjustment is made upon the property market, the investors will not be too pessimistic to lead to the irrational plummet of the real estate market. What’s more, the real estate market in China is contained by the monopoly by the government and the storing of real estate companies, while the demand is promoted by the process of urbanization, resulting in the demand over supply. It is quite different from Japan, since the prosperity is backed up by real demand of investors and consumers.
Conclusion
As mentioned before, based on our research, comparison and analysis, our point of view is that there is slight bubble in China property industry, which is different from the one happened in Japan and was less severe. Thus, if China government can take immediate and effective action to deflate the bubble, China property industry can still lead a healthy and promising future. Recommendations to Deflate Bubble: Finally, we come up with some recommendations to deflate the bubble.
Reinforce the supervision and control of real estate market. On one hand, China’s transaction system of land and the industry supervision system is still developing, which accelerates the speculation and results in slight bubble. On the other hand, over-investment on property make the overall growth of property industry surpasses the growth of urbanization significantly and results in the imbalance between supply and demand and the increase of housing vacancy rate. Thus, first about how to prevent over-speculation, it’s essential for the China government to make out specific policies for all-round supervision of the real estate market.
No only national policies , but also policies based on different situation of local places, especially those developed cities. Even though speculation on property in China is not as heat as the one in Japan, the first step to deflate bubble is to establish the basis for supervision and control by setting specific and reasonable policies. As for cool down the over-investment on property, the government should keep controlling the scale of property development at a stable speed. That is, first to invest based on local places income level and reduce overstock.
Second, to reinforce the supervision on second market and prevent over-speculation. Last is to further develop housing based on real demand, sector with deep insight of property market and make Property the leading industry in China without bubble.
Strengthen land resources management Government can keep a good control on housing price through the supply of land resources. The supply of land resources should be based on local market demand and public bids system should be used under supervision. The usage of land resources should also keep a balance between housing and business use.
Furthermore, to punish irregular investment and development, keep a close supervision on the developers, and make necessary amendments to the rules and regulations are important. Besides, it’s necessary to prevent corruption among the government and developers in China as to strengthen land resources management.
Build up a sound forecast system for healthy development of property industry As important as supervision and control, building up a sound forecast system is crucial for risk management ,come up with timely reaction and deflate bubble. By collecting & analyzing information on property market, predicting and evaluating properly on the market based on analysis and publishing research report by period, the government can make out proper policies and better supervise property market. Also, the investors and developers can have a better and clearer evaluation on the whole property market, which may benefit reasonable investment.
Strengthen supervision on finance sector and prevent loan risks There is a strong combination between property sector and finance sector, no matter in Japan or China. To deflate the bubble, it definitely should strengthen supervision on finance sector and take financial strategy to deflate the bubble. For example, China had made several moves in the last month to do just this, including reimposing a sales tax on homes sold within five years of their purchase from this year and increasing the down payment requirement for property purchases to at least 50 percent of the total price.
In another move to cool the property market, the People’s Bank of China, the central bank, announced on Tuesday to raise the deposit reserve requirement ratio by 0. 5 percentage points from Jan. 18 this year. The government also renewed its pledge on Wednesday to stabilize home prices by providing more affordable housing and cracking down on speculation.
Keep the RMB exchange rate’s long-term stability In 1985, Japanese yen’s appreciation was forced under the great pressure put by America. Then to alleviate depression caused by decreasing exports, Japan’s government substantially reduced the interest rate to stimulated domestic demand, which Led to the expansion of real estate financing and become the driving force for real estate bubble. Learning from this, China should Keep the RMB exchange rate’s long-term stability.
Analysis on China Real Estate Industry. (2017, Dec 27). Retrieved from https://paperap.com/paper-on-analysis-china-real-estate-industry/
